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Compliance Week Europe

Published every Thursday, Compliance Week Europe offers a condensed summary of risk, audit, and compliance news either originating in Europe, or of special interest to European compliance professionals. This newsletter will follow developments by the European Commission, as well as those of national governments across the region, or any U.S.-based news that might have consequence across the Atlantic. Frequency: weekly; Thursday a.m.

Published every Friday, Compliance Weekend was launched at the behest of subscribers, and offers a quick Plain English review of the week's key developments. We hope you enjoy this supplement to Compliance Week's Tuesday edition.

The European Commission this week released the first prong of its enhanced regulatory approach toward the so-called shadow banking sector with proposed new rules for money market funds.

Shadow banking – which the commission defines as the system of credit intermediation that involves entities and activities outside regular banking – is less regulated than the traditional banking sector. The Financial Stability Board estimated the size of the global shadow banking sector was €51 trillion in 2011.

The commission is first targeting money market funds (MMFs) with the goal of improving their liquidity and stability, which would help the funds better weather redemption demands in a faltering market.

“We have regulated banks and markets comprehensively. We now need to address the risks posed by the shadow banking system,” Internal Markets Commissioner Michel Barnier said in a statement. “It plays an important role in financing the real economy, and we need to ensure that it is transparent and that the benefits achieved by strengthening certain financial entities and markets are not diminished by the risks moving to less highly regulated sectors.”

Barnier is referring to the fear that as new financial safeguards are put in place to regulate the traditional financial sector, certain business could be pushed into the shadow sector. The commission's actions are a result of its overall scrutiny of the financial system following the 2007 economic crisis.

The rules would apply to money market funds domiciled or sold in Europe.

In the future, the commission also plans further action targeting the transparency of the shadow banking sector, securities law and securities financing transactions, and a framework for interactions with banks. On this last piece, the commission is suggesting tighter rules governing how banks interact with unregulated financial entities. Because of the linked nature between the traditional and shadow systems, the shadow system presents a major contagion risk, the commission said. The commission also plans to look at the creation of resolution rules for non-bank institutions, and further structural reform of the banking system.

Similar recommendations from the Financial Stability Board were expected to be endorsed during the G20 summit scheduled for later this week.